Moneyball, Again

This article is interesting for what it says about executive wages and what it didn’t say. If you scroll down to the reference to $400,000, the article says that the higher executive wage will hurt the team by reducing the money available for the workers. I wonder they are teaching this at the Stanford Business School.

Leonhardt, David. 2006. “Why C.E.O.’s Aren’t Sitting in the Dugout.” New York Times (4 October).

“Just over a year ago, the man who held the purse strings at a private company outside San Francisco began negotiating a new employment contract with the executive who ran the day-to-day operations. The company had recently turned around, thanks in part to the executive, and the company, understandably, wanted to keep him. It offered him a salary of almost $1 million a year, which it considered in line with the market.”

“The executive asked for almost $1.4 million. But the company wouldn’t budge. Its message was simple: We like you and we want you to stay, but that doesn’t mean you can name your salary.”

“Anytime you’re running a business, you have to set a value on employees relative to your business,” the part-owner in charge of the negotiations told me a couple of weeks ago. “And before any negotiation starts, you have to consider your alternatives.”

“So the executive and the company parted ways. It started interviewing other candidates, and he began interviewing for similar jobs elsewhere. Until the situation took an unexpected turn — and more on that later — an otherwise good relationship looked as if it was going to be ruined by money. We know these details because the company in question was not an ordinary private company. It was the Oakland A’s. The part-owner was Billy Beane, perhaps the best-known general manager in baseball. The executive was the team’s on-field manager, Ken Macha.”

“One of the many baseball fans following this story last October was a retired banker named Robert L. Joss, who had become the dean of Stanford Business School after having been a vice chairman of Wells Fargo and the chief executive of an Australian bank. As he read the local newspaper accounts of the breakup between Mr. Beane and Mr. Macha, Mr. Joss was struck by a thought: “You’d never see this in corporate America.”

“It’s difficult, in fact, to come up with a single example of a company and its chief executive splitting up over pay. Chief executives retire and are fired. But as long as they remain on the job, they evidently don’t end up disagreeing with their boards about how valuable they are. The negotiation over a chief executive’s pay is one that never seems to fail, which, of course, means that it isn’t much of a negotiation at all. It’s more like a friendly conversation.”

“But the Ken Macha story is a wonderful allegory because it highlights a more subtly human problem with pay. When directors at a big company think they have found the right person for the job, they persuade themselves that no one else on earth could do it as well. They basically fall in love. Once that happens, almost no price seems too high.”

“The Oakland A’s, however, can’t afford to fall in love. Their modest budget allowed them to spend just $62 million on players this season, compared with the Yankees’ $200 million payroll.”

“The contrast between this hard-headed approach and corporate America’s cult of personality was especially clear to Lewis Wolff, the A’s 70-year-old managing partner who was both Mr. Beane’s and Mr. Macha’s boss. Before buying the A’s last year, Mr. Wolff ran 20th Century Fox’s real estate division for a time, and he now sits on the boards of two New York Stock Exchange companies. “At my advanced age,” Mr. Wolff said, laughing, “I’m learning from Billy.”

“Billy — as Mr. Beane is almost universally known — understood that Mr. Macha had real value as a manager. He helped the A’s overcome a dreadful start in 2005 and go on a late-summer run that nearly won them another division title. But Mr. Beane also understood that the additional $400,000 a year his manager wanted was $400,000 the team wouldn’t be able to spend on a player who could make the difference between second place and first.”

“So the team held firm, and one year ago this week, after the 2005 regular season ended, Mr. Macha returned home to the Pittsburgh suburb of Export, where he began looking for a manager’s job with another team. On the plus side, the teams with openings generally gave their manager more of a say than Mr. Beane’s carefully proscribed system did. But these other teams also weren’t very good, and there was no guarantee that Mr. Macha would get one of the jobs anyway.”

“A week later, Mr. Macha received a handwritten note from Mr. Wolff. “You’ll be successful at anything you do,” it said, according to Mr. Macha. “Thanks for a great season.” The letter caused Mr. Macha to reconsider. That night, he called Mr. Beane, and they had a conciliatory conversation that ended with Mr. Beane saying, “What can I do to help you?” Within a few days, they signed a deal very similar to the one the A’s had originally offered.”

“This season, despite a rash of injuries, the team built by Mr. Beane and run by Mr. Macha won its division again. While the Boston Red Sox (payroll: $120 million), Los Angeles Angels ($103 million) and San Francisco Giants ($91 million) have all been eliminated, the A’s beat the Minnesota Twins, 3-2, in the first game of the American League playoffs yesterday. The two teams play again this afternoon.”

[The A’s won again.]

“As Mr. Joss, the Stanford dean, sees it, there is more than one lesson to the story. Certainly, board members should realize that no employee is irreplaceable. But they should also remember that they have great leverage in pay negotiations, because being a chief executive — like being a big-league manager — is an enormously appealing job.”

“Not only is it good economically, but it’s meaningful work: The executive is doing something he loves, and he is part of something,” Mr. Joss said. “You wonder how many C.E.O.’s would really leave these jobs.”